Signing the best player is one thing but creating the best team is quite another. When the star steals the show we rarely notice the rest but it’s often the wider squad’s synergy that allows them to shine in the first place. It’s why head chefs have a trusted sous in their brigade and why the award for Best Supporting Actress even exists.
The same is true of the funds in your portfolio. Sometimes a manager will give you exactly what you’re looking for in a certain sector or geography but more often than not it’s the combination of a few strategies that will give you what you need over the long term.
The question then is how best to select your team so that it’s capable of tackling whatever comes next; ready to hand leadership back and forth over time for the good of the overall portfolio.
The UK fund space is a good case study here. Looking specifically at the UK sector on the Select 50 we can start to see where funds can support each other and why it’s not always just a case of picking one option and moving on.
Of course, these examples are just that - examples, and not a blueprint to meet everyone’s needs. For those, you’ll need to consider your individual goals, risk tolerance, time horizon and current asset allocation to see if you need to fill any gaps.
Value & growth
One way to differentiate strategies is a fund manager’s style. Do they swim against the tide and look for unloved companies, or go for the big names dominating their industries? Alex Wright’s Fidelity Special Situations is a good example of the former.
The rationale behind Wright’s process is that highly-valued companies have little potential to rise much further, whereas undervalued shares can rise sharply if things turn out to be better, or no worse, than the consensus expects.
Quality growth offerings like Liontrust UK Growth can balance things out, making sure investors’ entire UK exposure isn’t based purely on turnaround stories over the long term.
Managers Julian Fosh and Anthony Cross look for companies with distinct intellectual property, strong distribution and high levels of recurring revenue. Then it’s a case of figuring out how they translate into concrete value and so, what price the Liontrust team is prepared to pay for the company’s shares. As Fosh says: “It’s all very well to identify a group of terrific companies but if you pay too high a price for them you’ll never succeed in achieving acceptable returns for your investors.”
Using both types of funds in tandem means investors can be ready for both value and growth environments and don’t get sucked into trying to time the end of one paradigm, and position for the next.
Across the cap scale
Another way to sort between funds is the size of the companies they aim to invest in. The likes of Select 50 newcomer Lazard UK Omega looks at the top end of the scale and could be complemented by portfolios targeting firms outside the FTSE 100, like the Threadneedle UK Mid 250 Fund. Of course, in this case the aim isn’t to try to invest in every company across the whole size spectrum, there are simpler and cheaper tracker funds out there to do that.
However, in the UK it’s particularly important to think about where fund managers are looking, given that companies become more and more tied to the UK economy the further you go down the cap scale. Around 75% of FTSE 100 company earnings comes from outside the UK. In the FTSE 250, this drops to 50% and is lower still among smaller businesses serving the domestic economy1.
This means performance can vary significantly when currency movements, consumer spending and national politics come into play. Finding a balance that suits you between these strategies means different parts of your portfolio can pick up the slack if another begins to wane.
Core & satellite
And then there are the funds that can serve as core parts of your portfolio, around which a range of funds can orbit. The likes of the Franklin UK Equity Income Fund on the Select 50 is one of many here. Investors with equity income at the heart of their objectives will be able to combine an offering like this with funds from different sectors, making sure income diversification comes from geographical exposure and asset classes.
Colin Morton manages the Franklin fund alongside colleagues Ben Russon and Mark Hall. The focus, he says, is on companies where the dividend is not just high compared to the market, but sustainable and likely to grow.
“We all know that more than half your return in the long term comes from dividends being reinvested, but the growth in the dividend is also crucial to that long-term return.” says Morton.
As with everything in life, it’s about balance. We don’t know what’s coming next so giving yourself the chance to be part of growth - wherever it comes from - starts with setting up a diversified portfolio from the beginning.
1 Goldman Sachs Global Investment Research, March 2019
Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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